Investing.com -- In a note to clients Wednesday, Baird downgraded Kohl's Corporation (NYSE:KSS) to Neutral, citing a combination of ongoing challenges and heightened uncertainty.
Analysts highlighted issues in the retailer's core apparel and footwear segments, volatility in comparable sales, and potential strategic shifts under new leadership.
"We're stepping to the sidelines as ongoing pressure in the core apparel/footwear business (implying share losses during back to school period), greater comp volatility as management iterates on changes to the operating model, and a pending CEO change (announced Monday night ahead of results) each reduce our conviction in the value case for shares," Baird wrote.
The firm expressed concerns over the sustainability of Kohl's dividend, despite modeling free cash flow next year exceeding the dividend payment.
"The high payout ratio limits financial flexibility, especially considering some upcoming debt maturities," Baird noted.
Additionally, they state that the announcement of a pending leadership transition adds to the uncertainty.
Incoming CEO Ashley Buchanan, a retail veteran, is aligned with existing strategic initiatives, but Baird remarked that the turnaround potential under outgoing CEO Tom Kingsbury was a key element of their previous thesis.
Baird pointed to other potential upsides, such as ramping credit income streams, adjustments to merchandising efforts, and a possible rebound in consumer spending. However, they also flagged risks with the company's Q4 guidance, which they deemed optimistic, especially given weaker performance in August.
The analysts concluded that earnings visibility remains low and risk/reward for Kohl's stock appears balanced at its current levels. They set a new price target of $18 on the stock, based on 5-5.5x EBITDA multiples.